Co-signing a Loan
What would you do if a friend or relative asked you to cosign a
loan? Before you answer, make sure you understand what cosigning
involves. Under federal law, creditors are required to give you a
notice that explains your obligations. The cosigner's notice
states:
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You are being asked to guarantee this
debt. Think carefully before you do. If the borrower does not pay
the debt, you will have to. Be sure you can afford to pay if you
have to, and that you want to accept this responsibility.
You may have to pay up to the full
amount of the debt if the borrower does not pay. You may also have
to pay late fees or collection costs, which increase this
amount.
The creditor can collect this debt from
you without first trying to collect from the borrower.* The
creditor can use the same collection methods against you that can
be used against the borrower, such as suing you, garnishing your
wages, etc. If this debt is ever in default, that fact may become a
part of your credit record.
This notice is not the contract that
makes you liable for the debt.
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* Depending on your state, this may not apply. If state law
forbids a creditor from collecting from a cosigner without first
trying to collect from the primary debtor, this sentence may be
crossed out or omitted altogether.
Cosigners Often Pay
Studies of certain types of lenders show that for cosigned loans
that go into default, as many as three out of four cosigners are
asked to repay the loan. When you're asked to cosign, you're being
asked to take a risk that a professional lender won't take. If the
borrower met the criteria, the lender wouldn't require a
cosigner.
In most states, if you cosign and your friend or relative misses
a payment, the lender can immediately collect from you without
first pursuing the borrower. In addition, the amount you owe may be
increased - by late charges or by attorneys' fees - if the lender
decides to sue to collect. If the lender wins the case, your wages
and property may be taken.
If You Do Cosign
Despite the
risks, there may be times when you want to cosign. Your child
may need a first loan, or a close friend may need help. Before you
cosign, consider this information:
- Be sure you can afford to pay the loan. If you're asked to pay
and can't, you could be sued or your credit rating could be
damaged.
- Even if you're not asked to repay the debt, your liability for
the loan may keep you from getting other credit because creditors
will consider the cosigned loan as one of your obligations.
- Before you pledge property to secure the loan, such as your car
or furniture, make sure you understand the consequences. If the
borrower defaults, you could lose these items.
- Ask the lender to calculate the amount of money you might owe.
The lender isn't required to do this, but may if asked. You also
may be able to negotiate the specific terms of your obligation. For
example, you may want to limit your liability to the principal on
the loan, and not include late charges, court costs, or attorneys'
fees. In this case, ask the lender to include a statement in the
contract similar to: "The cosigner will be responsible only for the
principal balance on this loan at the time of default."
- Ask the lender to agree, in writing, to notify you if the
borrower misses a payment. That will give you time to deal with the
problem or make back payments without having to repay the entire
amount immediately.
- Make sure you get copies of all important papers, such as the
loan contract, the Truth-in-Lending Disclosure Statement, and
warranties - if you're cosigning for a purchase. You may need these
documents if there's a dispute between the borrower and the seller.
The lender is not required to give you these papers; you may have
to get copies from the borrower.
- Check your state law for additional cosigner rights.